2 Competitive markets: Demand and supply

Unit 2 - Microeconomic

Market

Any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.

Competition

A process in which rivals compete in order to achieve some objective.

Competitive markets

Markets composed of many sellers and buyers, and no individual seller or small group of sellers can control the price of the product sold.

Demand

The various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.

Ceteris paribus

All other things held constant

Law of Demand

The claim that, other things being equal, as the price of the good increases, quantity demanded falls - as the price falls, quantity demanded increases

Market demand

The sum of all individual demands for a good.

Non-price determinants of demand

Variables other than price that can influence demand.

Normal goods

Goods that varies positively with income.

Inferior goods

Goods that varies negatively with income.

Substitutes goods

Goods that can serve as replacements for one another.

Complementary goods

Products and services that are used together.

Supply

The various quantities of a good (or service) the firm is willing and able to produce to the market for sale at different possible prices during a particular time period, ceteris paribus.

Law of supply

The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises; as the price falls, the quantity supplied also falls.

Market supply

The sum of all that is supplied each period by all producers of a single product

Non-price determinants of supply

The variables (other than price) that can influence supply, and that determine the position of a supply curve; a change in any determinant of supply causes a shift of the supply curve, which is referred to as a 'change in supply'.

Competitive supply

A situation where two goods compete for the same resources. Example: A farmer can produce wheat or corn, but producing more of one means producing less of the other.

Joint supply

Refers to the production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other. Example: Butter and Skimmed milk are both produced from whole milk, producing more of one means to produce more of the other.

Subsidy

A government payment that supports a business or market.

Surplus

"Excess supply" - When the quantity demanded of a good is less than the quantity supplied; occurs when the price in the market is above the equilibrium price.

Shortage

"Excess demand" - When the quantity demanded of a good is more than the quantity supplied; occurs when the price in the market is below the equilibrium price.

Market equilibrium

The point where the supply curve of a good or service crosses the demand curve, at the price where the quantity demanded equals the quantity supplied.

Equilibrium

State of balance.

Equilibrium price

The price that is set by the interaction between consumers and producers in markets where there are no surpluses or shortages and the market has cleared.

Equilibrium quantity

When the quantity demanded equals the quantity supplied; this occurs at the equilibrium price.

Competitive market equilibrium

Quantity demanded equals quantity supplied, and there is no tendency for the price to change

Price mechanism

The way in which price changes affect quantity demanded and quantity supplied, thus determining resource allocation in a market.

Signalling

A private response to the problem of asymmetric information in which participants with more information communicate this information to the other party.

Signalling function of prices

The function of the price mechanism where information is provided to consumers and producers about what should be consumed and produced.

Incentive function of prices

The function of the price mechanism where motivation is provided to consumers and producers to reallocate resources in a market.

Allocative efficiency

Producing the optimal combination of goods from a society's point of view; achieved when the economy is allocating resources so that no one can be better off without making somebody else worse off.

Marginal benefit

The extra benefit you get from each additional unit of something you buy (marginal means extra or additional)

Consumer surplus

The difference between the price that consumers pay and the price that they are willing to pay.

Producer surplus

The difference between the price producers are willing and able to sell it and the price earned from selling the good at the market price

Social surplus (or community surplus)

The sum of the consumer surplus and producer surplus; the total benefit gained by society when the market is at equilibrium.

Welfare

The amount of consumer and producer surplus.

Welfare loss

The loss of community surplus that is the result of government intervention or market failure. Also called deadweight loss.